Definition For Core Competency Gets Extreme

With more viable options available, the definition of what is, and what isn't, a core competency at a capital markets firm continues to narrow.

Challenge: Banks are no strangers to outsourcing, but as more and more processes are no longer considered as "core competencies," the middle and even front office could be a target for outsourcing.

Why It's Important: Recently, outsourcing has taken on a different connotation than it had just five years ago. Then, it was about taking highly repetitive and lesser value tasks and pushing them outside of the organization. Today, outsourcing is more than driving down costs; it's about driving up quality.

Alan Paris, principal at outsource provider eClerx, explains banks and other financial firms are under immense pressure to cut costs, and increase concentration on their core business.

Beyond business process outsourcing (BPO), mangers are looking to knowledge process outsourcing (KPO) for a higher intellectual return. "This leads to some fairly transformative strategies, because where we play is in these more complex and difficult to manage processes," Paris says. "With KPO, you're performing additional value added functions like making decisions, creating research, doing the analysis and analytics business intelligence, providing valuations. That's really where this business is going."

The search has begun for outsourcers who can lift out entire operations -- people, software, vendors -- and leave behind only the portfolio managers, marketing and some aspect of trading and oversight.

Where The Industry Is Now: Can outsourcers keep up with demand? Gary Brackenridge, Linedata's global head of business for hedge funds, says his firm continues to see existing outsourcers in the middle and back office space expand offerings and try to find right model that's profitable, while also providing great service.

"We continue to see challenges there. Those challenges are born from a couple areas. First, how is the outsourcer going to do better than a firm who does it themselves? Can they replicate the "special sauce?' And yes, cheaper counts, but as good or better has to be part of the requirement," says Brackenridge. "Secondly, having worked with outsourcers for many years, quality of service problems continue to be the greatest challenge facing outsourcers today in the middle and back office."

Focus In 2014: New entrants and specialists in outsourcing, especially in the front office, will take on traditional in-house activities and able to match or exceed quality of services done internally.

In line with the trend, Gerry Turner, executive director of Object Trading, reports a spike in financial service firms looking to outsource middle and front office responsibilities, adding they are not just seeing more clients, but signing them up at an accelerated pace.

"It's still messy out there," adds Linedata's Brackenridge. "Firms have pieces of the solution. Some are picking up clients, others are losing clients, and you've got the clients who don't see a clear winning model yet. 2014 will bring clarity to emerging standard outsourcing models, but it will take some time."

Industry Leaders: Fund administrators and related custodian banks such as BNY Mellon, JPMorgan, Citibank and Northern Trust have some versions of investment management outsourcing today. Within the bounds of what they're offering, it's traditionally middle and back office functions, which is ideal if you wanted someone to manage books and records, deal with counterparties, keep reports up to date, and calculate values.

Technology: Front-office outsourcing has not traditionally been offering from fund administrators. Instead, that work is primarily done by a handful of specialty providers globally. Among those names are US-based Gravitas, Kinetic Partners, Australia-based HFO, and Hong Kong-based QRMO. These firms are currently offering front-office and risk-based solutions to investment managers.

Prediction: Firms are trying to redefine what they do and where they should spend time and efforts. As a result, the outsourcing market will expand globally over 2014 in terms of numbers of clients engaged in outsourcing and the breadth of services they are looking to acquire. We can also anticipate the market to expand in the number of companies offering services.
Becca Lipman is Senior Editor for Wall Street & Technology. She writes in-depth news articles with a focus on big data and compliance in the capital markets. She regularly meets with information technology leaders and innovators and writes about cloud computing, datacenters, ... View Full Bio

Innovation being such a popular topic these days, I would like to point out a pattern I have observed. After a long and involved outsourcing implementation, the last thing that vendors seem to want to do is to rock the boat in any way. They don't want to destablize a freshly debugged environment, and they don't want to incur even more costs on behalf of that client they just brought on board.It is not typical for these vendors to allocate development hours to customers on an ongoing annual basis, even though things change for their customers as part of natural change and drift. If you are lucky enough to have the vendor improve their systems in ways that happen to help you, great, but in general stability seems far more important to them than innovation.

True. If outsourcing is successful, it's bound to expand. But IT is not going to want to go overboard with outsourcing as it downsizes their function. The decision is probably made at the CEO and CFO level.

Jason, I agree that outsourcing has been a cyclical trend that ebbs and flows with economic pressures. Wall Street firms have been reluctant to outsource front office apps such as trading analytics which they regard as their intellectual property. If the bulge bracket outsourced their algos what would be their competitive differentiation? Lifting out the middle and back office is not viewed the same way. Hedge funds have outsourced compliance with Form PF, for example, to comply with the regulation. There are also variations on the theme, insourcing, and co-sourcing where staff and software/hardware dedicated to the client.

Outsourcing everything will lead to so much similarity in service, product quality and marketing across industries that we'll all wake up one day to a silent, colorless, odorless world...until someone realizes that outsourcing everything is wrong...and then everything becomes in-sourced again. It's a cycle.